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I just recently inherited 25% shares/stake in my father's…

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I just recently inherited 25%...
I just recently inherited 25% shares/stake in my father's LLC after his passing. I have a few issues. The others are pushing me to sell my shares (evaluated at $145,000 by an assessor) for $100,000. I am confused as they keep saying I will "net" $100,000 after they are finished paying out (they will be paying out under a promissory notes), but I am confused as they keep saying they will report to the state that the sale was for $145,000. So:1) Would me reporting the "$45,000 loss" in the sale cover a tax burden or would I still be paying the taxes on the $100,000 remainder?2) If I kept the shares, I know I will need to file a K-1 and generally the business is profitable. Would my tax burden be much greater since I am technically a business owner (even though I would be passive), or overall would it make more sense to sell the shares and take the brunt of the income tax over the next few years as they pay it out? I make $40,000 per year and I know that either way this will push me into a different tax bracket, but I need some honest advice as to what will benefit me since I am young and trying to finish nursing school. Thank you!
Submitted: 1 year ago.Category: Finance
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11/23/2016
Financial Professional: Stephen G., Sr Financial Expert replied 1 year ago
Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 7,286
Experience: Extensive Experience with Tax, Financial & Estate Issues
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Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

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Customer reply replied 1 year ago
Thanks Steve. Please let me know if there is any more information you need.
Financial Professional: Stephen G., Sr Financial Expert replied 1 year ago

Who are the "others"? What was their relationship with your father? What is their interest in the LLC?

Who are "they" proposing you sell your shares to?

What business does the LLC conduct?

Did you father own 100% of the LLC?

Are you saying your 25% interest was valued by an accredited business appraiser at $145,000.?

You would have no income tax obligation on the sale of your shares if you sold them for $145,000., as that would be your income tax basis (tax cost) as your basis is "stepped up" to the fair market value of the shares as of your father's date of death. Generally, if an asset is sold within 9 mos to 1 year after the date of death, the IRS will accept the selling price as the date of death fair market value.

Why would you not sell your shares for the $145,000. value assigned by the appraiser?

There's no tax to pay on the sale of the shares, so there's no benefit of selling the shares for less than they are worth.

If the business is profitable, you should be receiving profit distributions. Your existing income will not be placed in a higher tax bracket if you keep the shares. I would not sell your interest in the LLC without an independent business advisor, perhaps a local CPA, who can look over the financial statements of the LLC, evaluate the management of the company, the control, and give you a better analysis of what your best option is with respect to your 25% interest in the LLC.

If you wish, you can answer the questions I've noted above, but I'm pretty sure I can anticipate the answers to most of those questions. I don't think that it's likely to change my recommendations.

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Customer reply replied 1 year ago
Who are the "others"? What was their relationship with your father? What is there interest in the LLC?
- These would be my brothers, all 4 of us were next of kin. Unfortunately my dad had no will.Who are "they" proposing you sell your shares to?
- I believe they want me to sell my shares back into the business (to be divided between the other 3).
What business does the LLC conduct?
- It is a furniture business, 2 locations (both leased) and the assets within the business are just the stock and office supplies, computers, etc.
Did you father own 100% of the LLC?
- Yes he was sole owner.
Are you saying your 25% interest was valued by an accredited business appraiser at $145,000.?
- Yes, a 3rd party appraiser was hired on behalf of the estate, and given the marketability and the 4 way split, this is what they assessed (15% loss for lack of control and then 45% due to the marketability).As for selling my shares for $145,000 I am not sure to be honest. I have no idea who I could possibly sell my shares to, the process, etc. I think that is why they may be trying to back me into a corner to sell my shares back to them so my oldest brother has control.I will likely be pursuing getting a local business analyst at this point since I frankly need more advice, but I unfortunately have little funds to afford constant advisement and thus why I started my search here.As for the profit distributions, my father passed in December of 2015. Wouldn't I receive distributions only at the end of the year or can these be done at any point?Thank you so much for the help!
Financial Professional: Stephen G., Sr Financial Expert replied 1 year ago

So, the business was valued at $580,000. in total? That's the net after reducing the total by 15% & 45%?

So the total value of the business, before discounts is in the neighborhood of $1,240,000.? If not, please give me the actual numbers.

You really need to engage a CPA to make sure any sale is structured properly from your standpoint. I believe what they are suggesting is a Stock Redemption and having the LLC itself pay out the proceeds over a period of time, with you holding the note from the Company (the LLC).

If you are not involved in the business, it probably makes sense for you to sell your shares, as long as the price is fair. You'll be able to work out a satisfactory payment arrangement with a CPA where most of what you would owe should be able to be deferred until the sale.

I've served as an expert witness in both federal & state courts, and when there's a buyout between family members, those discounts are pretty aggressive. In essence, your brothers are keeping 75% of the business with no discount, and paying you less than 50% of your pro-rata (25%) share of the business. It hardly seems like a fair deal to me.

Also, you'll need your own attorney at some point, and a CPA can assist you with obtaining the right attorney when the time comes to make sure the actual documents are acceptable. You have to have your own professionals, otherwise the terms of the transaction may not be favorable to you and could be a problem going forward. For example, your brothers should personally guarantee the note from the Company to you.

Steve G.

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Customer reply replied 1 year ago
Steve,THANK YOU, ***** ***** much. Your advice has been more than helpful.I felt like it wasn't exactly a fair deal and I have already sent out a few requests to local CPA's to see if they will meet to discuss my case.I appreciate the advice on the CPA, I will see what arrangements can be made to attempt to make fair payment.And to answer your questions, these are the lines from the assessor:Minority Interest:
Fully Marketable Controlling Interest Value of Equity $1,241,669
Aggregate Non-Marketable Minority Value $580,000I do know there is some complication since ~$20,000 was already "paid out" to me through the business as my brother was helping me to pay for rent and other burdens my father left in my hands when he passed suddenly. He keeps trying to use it as a reason for the devaluation as well, but even still I don't feel what is being offered is necessarily fair.From the assessment it says "Net Income Per Tax Returns" $187,000 for 2015 Normalized. I can safely assume that is the bot***** *****ne of where my distributions would come out of should I keep my shares?
Financial Professional: Stephen G., Sr Financial Expert replied 1 year ago

Good. Don't get pushed/rushed into anything.

"Normalized" means before/after certain adjustments. That's another reason you need your own representatives; so those figures can be evaluated; That was probably in the appraisal.

The $20,000. is peanuts compared with what you are talking about it. Those obligations are probably not solely yours to deal with anyway. That's no reason for "devaluation". Someone can assist assessing that adjustment too.

So as I figured, the total gross value is slightly more than the $1,240,000., I figured. How that translates itself down to an offer of $100,000. for your 25% share, leaves a lot on the table. That's less than 8% of the gross value of the Company. As I said, I would question those discounts in light of a family buyout transaction.

As a retired CPA who has done many, many of these deals representing both sellers and buyers, family & independent, make sure that when you decide on a CPA, you feel that your personalities mesh and that you can develop confidence in him/her.

One suggestion, if you want to locate a CPA in proximity to your geographical area, go online to your state's Society of CPAs and they will have a referral service by specialty and geographical area.

Good luck & if you want to reach me again here at JustAnswer.com, just ask for "Steve G" at the beginning of your question. I'd be happy to give you a second opinion on anything that comes up.

Steve G.

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